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The Five Stages of Profitable Retailing, Part OneBy David Brown, Edge Retail Academy |  May 17, 2017 (0 comments)

Omaha, NE—Having been around this industry for more than 20 years, it takes a bit for me to get excited about something new … let alone a retail epiphany. But that is what happened to me recently, and I want to share that experience with you!

In this first article, I will be discussing stages one and two of the five stages.  Before I get started, here are the "Five Stages:"

1. What to do before you buy
2. How to buy better
3. How to sell what you buy
4. What to do if it sells quickly
5. What to do if it doesn’t sell? Know your exit strategy

You might be asking, so where’s the epiphany?  Granted we have probably all heard of these stages in one form or another, but it’s the combination, and order of them, that caused me to have the “aha moment.”

Just as a good recipe helps us recreate a proven formula for baking the perfect muffins, if part of the recipe was missing key ingredients, or was wrong, the muffins would become a flop.  What if the ingredients were wrong, or the quantities, or the sequence or the cooking instructions … what then?  Well I can tell you, if you mixed all of the ingredients perfectly but forgot to put them in the oven, or if you put the ingredients into the oven before you combined them? You’d have a baking disaster!

A bad batch of muffins is not such a big deal in the grand scheme of life, but if you apply the same principals to your retail business, it quickly becomes a big deal.

Messing up a batch of muffins is minor but messing up your retail business is a big deal.

Imagine the financial carnage of buying more than you can afford, or of buying the wrong product for your market, or buying from vendors who can’t replenish, or not being able to sell what you bought. Or maybe you don’t have to imagine it. Maybe you’re living with the consequences already: poor cash-flow, mounting payables or debt, a low return on your investment, aged inventory costing you 20% every year it sits there, et cetera. Sound familiar?

But on the positive side, if you follow this retail recipe and give equal and careful attention to each of the five stages, you will not only buy better, sell better and manage better, you will have a sustainable retail business model and money in the bank to provide for your family, your lifestyle and your retirement.

Stage 1: What to do before you buy. Before you go to a show, sit down with a vendor or place any orders (other than re-orders) you need to know what you’re trying to achieve i.e. you need a budget and a plan to achieve it. 

But not just any budget: you need a GAP budget. I know, I know! For many of you, budgeting and numbers are an area of your business that you either don’t understand or enjoy.  But most of you would admit that budgets are a key part of the business that shouldn’t be neglected. Let’s face it, you wouldn’t dream of building a house without a plan, or even taking a trip without a map or a plan.  So think about how dangerous it is, to go along day-by-day in your business without any clear objectives in mind.

Budgets are little more than goals for your store to achieve.  A study of Harvard graduates in the mid 1950’s showed that only 3% of the graduating class had any clear written goals for when they completed their study. A follow up some twenty years later discovered that the same 3% of students had amassed a level of wealth more than the other 97% of graduates combined!  Do you have a truly meaningful budget (one that meets the owners short term (this year), medium term (5 years) and long term (retirement) financial goals?  How about a general idea of where you ‘want’ to be (normally based on last year plus a percentage increase)?  Or do you rely on ‘hope’ as a strategy?

Before setting a budget, it is important to prepare a GAP analysis – where the owner determines the gap between the businesses current performance and where they need it to be at the end of their remaining working life.  A business owner with 10 years working life and $100,000 in savings will have a lot more work to do if they want $1 million in retirement savings compared to an owner with $500,000 already saved and 20 years of working life ahead of them.  Determining your savings and lifestyle needs and working backwards to determine the levels of profit needed to meet those needs (and hence the level of expenses, gross profit, sales and ultimately inventory you require to reach that profit) is the most effective way to set your budgets.

The ‘GAP Analysis’ includes:

1. The ‘Net Profit’ you need to pay your operating expenses (including a market salary for yourself); to get an appropriate return of your ‘capital investment’ and to provide for your retirement
2. Based on 1. above, the ‘Gross Profit’ Gap or difference between the required and current Gross Profit
3. Based on 2. above, the ‘Sales’ Gap between required and current sales
4. Based on 3. above, the ‘Inventory’ Gap between your required and current inventory and to deliver an acceptable Gross Margin Return On Investment (GMROI) – anything less than 100% ($100 of Gross Profit from every $100 of Inventory) is unacceptable.     

Other considerations before you start to buy include:

1. What type of store are you or do you want to become?  For example, if you want to become more of an upscale Bridal store, that will determine which vendors you talk to and what type of product you buy.

2. What is your growth strategy?  There’s an old saying ‘you can’t shrink your way to greatness’ but you also can’t spend your way to riches.  If you’re a $2m store with the potential and desire to become a $5m store, you will need more inventory than a $2m store needs (otherwise how else can you grow?) but not enough for a $5m store or you’ll have major funding issues ... not to mention a lousy GMROI.

3. You will need an Open to Buy (OTB) budget to control the flow of money as it washes through your business.

Once you know ‘how much’ money you have to invest, carefully plan where to invest it; e.g.:

• Which categories and price points
• Your required Key Performance Indicators (KPIs) i.e. the margin you need, the average retail value you want to achieve etc. and work backwards to the buying price
• Which vendors to invest with
• Prepare a list of items to research/buy, vendors, fast sellers, current aged inventory. Consider 
• Local and Industry Market Trends.  Are there products or vendors making a move (in either direction) that you need to be aware of?
• Brands.  Your own brand is the most important asset you have, but what about other brands that could give you an ‘edge’ in your local market?
• Vendors.  Philosophically, we believe that it is better for you to become more and more important to fewer and fewer vendors.  Don’t just order from existing vendors because you always have … analyze their performance i.e. GMROI, their terms and their ability to replenish quickly.  Also check out the comparative performance and terms of new vendors who supply the same or similar product.

Stage 2 – How to Buy Better. Now you find yourself at a show (or sitting in front of a vendor) complete with your OTB budget, your new product list, a list of vendors to talk to (new and existing), your aged inventory reports (by vendor) and a very clear idea of what you want to achieve.

There’s a lot going on at shows, including social events, tempting offers, show specials etc., so it can be hard to stay focused and on track with your plan.  As a rule of thumb, if it’s not in your plan or your budget, research it by all means, but sleep on it before you act on it.  If you feel the same way by the end of the show or when you get back home, fine, trust your judgement. But if you’re making an emotional decision, think carefully.  Remember, you still own 80% of what you bought at previous shows after 12 months and 60% after 2 years.  Those are not the sort of odds you need for your retirement.   

Shows have several major benefits and purposes amongst them, networking with your fellow retailers, meeting with existing vendors to further enhance the relationship and to research new products, new vendors and new trends.

Assuming you have existing terms in place, Shows give you the opportunity to sit down with existing vendors and balance your investment e.g. more of the product that has sold for you and less of the product that hasn’t.  But first a word of caution.  Your relationship with your good vendors is symbiotic in nature i.e. you need each other, it is not a conquest where you win and they lose or vice versa.  To ask vendors to take back product that is already 12 months old, that you were slow to pay for first time around and you haven’t diligently re-ordered the product that did sell quickly, is frankly unfair and unsustainable (for them).

Good vendors don’t want you to be sitting on product that isn’t selling because it’s costing both of you money, but only if you’re one of the few retailers who re-order immediately and pay quickly. What vendor wouldn’t want to work with a retailer who pays quickly and takes responsibility for selling and managing their product, not just buying it?

Talking to other, successful retailers (ideally who already own the type of retail business you aspire to become) can help you identify vendors, brands and trends that are either on the way up or on the way out.

Here are some tips for hiring a new vendor:

• Research:
• Network at shows and ask other retailers about their experience
• Research trade magazines and trade organizations
• Ask for referrals or testimonials and actually check them out
• Make sure they are a good fit for your current and future business model. Are they a good personal fit for you i.e. do you trust and like them?
• What is their experience, track record and history in this market segment?
• Clearly articulate the expectations of the relationship, what I call the ‘Upfront Contract’:
• What you expect from them
• What they can expect from you
• Ask for exclusivity in your area (subject to you achieving minimum performance expectations). 
• At the very least, find out what other retailers carry the product, or are likely to carry the product, in your area.
• What ongoing support do they offer e.g. displays, training, packaging, brochures etc.
• Establish the quality of the product i.e. what assurances does the vendor offer and what do other retailers say about it.
• Establish terms i.e. payment terms, stock balance privileges.  If you really want to negotiate better terms, pay as soon as possible (preferably before they even expect to be paid) and re-order every time it sells until it stops selling (not until your staff ask you to get something different).
• Establish delivery expectations:
• Lead time for the initial order
• Lead time for re-orders (this is super important)
• Lead time for ‘Special Orders’
• Go with a ‘Hit List’, based on your OTB budget and be prepared to ‘research’ other new product they recommend.
• Think about your ‘Exit Strategy’.  I know we like to think everything we buy is going to sell, but I also know the facts that on the law of averages only 20% of it will sell quickly, so before you put anything on paper, ask yourself ‘what will I do if this product doesn’t sell within x days?’
• And remember, an item that sold quickly the first time has an 80% chance of selling quickly again the next time, whereas, if you take that same money and speculate with it, it only has a 20% chance of selling.  Are you a business entrepreneur or a gambler?  

In the next installment of this series, we will address how to sell what you've bought and, ultimately, what to do if what you bought doesn't sell; i.e. your exit strategy. If you have any questions or need customized strategies for your store, based on any of the ideas and details we mentioned in this article, please reach out so we can talk further about your needs.

Native New Zealander David Brown has over 15 years experience in consulting, training, and public speaking. In 1996 David began offering his own unique brand of specialized training and management services to retailers throughout Australia and New Zealand where, following an early introduction to the jewelry sector, he bought a half share in a jewelry store in Australia, and increased its sales and net profit threefold in just three years. HIs retail clients now include two of the major Australian jewelry buying groups, a major chain jeweler in Australia, and a New Zealand jewelry group who between them have a combined membership of 430 retail outlets. Brown conducts regular retail seminars, supplying vital industry benchmarking and trend analysis in addition to consulting with a number of the members on an individual basis. He is an expert in the areas of inventory management, sales growth strategies, retail systems and staff management and, with the development of powerful industry- specific software, Brown can business owners with information and strategies to significantly improve sales, profit margins, control, and ultimately peace of mind. Call (877) 569-8657 or email inquiries@edgeretailacademy.com